Gold drops 3 percent on technical sell-off, euro fears

NEW YORK (Reuters) - Gold dropped around 3 percent on Monday, its largest one-day drop in nearly three months, as doubts over a deal for European economic integration triggered a technical breakdown.

Gold and silver bars are pictured at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna August 26, 2011. REUTERS/Lisi Niesner

Bullion’s decline dwarfed losses in the equity and commodity markets after a European summit agreement failed to restore market confidence and borrowing costs in Italy and Spain rose.

Gold futures investors turned to put options to hedge downside risks, as heavy sell-stops below $1,700 an ounce sent the metal to its lowest level since late October.

On charts, a bearish technical pattern could lead to another $100 loss from current levels, traders said.

Spot gold dropped 2.7 percent to $1,663.86 an ounce by 2:19 p.m. EST, having touched a near two-month low of $1,657.04.

“In the near term, we believe gold will push lower, at least down to the $1,615 area but possibly more,” said Tom Fitzpatrick, chief technical strategist of CitiFX, Citigroup’s technical research unit.

“The head-and-shoulder top ... suggests that we can get a lot closer to the lows we saw in September, down toward or below $1,550 an ounce,” he said.

Head-and-shoulders chart patterns — which consist of a major rally or the head between two shoulders or smaller rallies — are considered reliable reversal patterns by analysts.

The next major chart support will be spot bullion’s 200-day moving average at around $1,615 an ounce.

U.S. gold futures for February delivery settled down $48.60 at $1,668.20 an ounce. Trading volume was about 10 percent below its 30-day average, in line with recently weaker turnover ahead of the year’s end.

Silver fell 3.4 percent to $31.10 an ounce.

Wall Street fell 2 percent after the European Central Bank was forced to step in again despite a summit deal over the weekend to strengthen budget discipline in the euro zone.

“Fears of gold liquidation to pay for losses in the equities markets has accelerated the downward move,” said Carlos Perez-Santalla, precious metals broker at PVM futures.

Perez-Santalla said that the situation in Europe was viewed by some investors as under control, and that view has been keeping gold out of its safe haven status.